severely compromised. The upside doesn’t justify the downside. In the old days, VCs could make eight or 10 times their money when things went well. Now, by the time you can take something public, it requires a lot more capital. The sheer amount of capital that has to go in has resulted in a lower multiple. You couple that with the rather dynamic nature of the stock market, with hedge funds hanging on every little piece of data, and sometimes overreacting both up and down, it results in a highly challenging public environment for biotech.

On the positive side, never has there been a better time for companies to be acquired. Not just by Big Pharma, but if you look at the statistics, it will tell you that over half of the mergers and acquisitions now are not coming from Big Pharma. That’s pretty exciting. Biotech companies have to follow up their first product with another product. Gilead Sciences has made a franchise out of doing this, as has Cephalon and others. If you look at the statistics on Japanese and European mid-market pharma companies, they are acquiring a lot too. The universe of people to acquire companies has gone up dramatically.

X: What advice are you giving to your portfolio companies to get through this?

AF: This will be a long-winded answer, I’m not sure I can be pithy about it. First, you have to focus on a business model that is realistic, i.e., that your exit is a sale. That demands a very different kind of business entity and all kinds of plans. The other thing I tell people is that in starting a company, they need to demand of themselves what we demand of ourselves. Frankly, we have to bring in expertise on regulatory affairs at a level we never had before. They have to have better understanding of what large payers think about their products. They need to know what Europe is going to do regulatory-wise. They need expertise in the manufacturing side. They have to have more answers to more questions than they did in the old days. It’s challenging.

X: It sounds like they need to raise their game.

AF: That’s what I say. I sound like this old grandfather, lecturing the children about how you have to raise your game. It’s challenging as hell. I don’t want people who read this or hear my speeches coming away too depressed. Our little Calistoga has an excellent future to it, just like it would four years ago, it’s just in a different market. We’re working with them to raise their game.

X: What two or three companies are you most excited about, and if they’re in your portfolio, you have to disclose that. Who do you think is still doing well?

AF: Look at Genentech. They’re continuing to do incredibly well. They have embraced great science with very smart clinical trials. They know their population they’re going after, and whether it’s going to work to increase their probability of success.

I think Gilead is another example of a great company embracing this notion that as a bigger company, you don’t have to do it all. You can use wise acquisitions to take up companies that make innovations.

X: What about here in Seattle? Who do you consider the up-and-comers? … Next Page »

One thing I wonder about is the sustainability of a model where a sale is the goal. Founders do well financially but often others do not. In many cases, the employees are let go, meaning they have to look for a new job.

Would many people put in the added years of graduate school and postdocs in order to work at a biotech startup for a couple of years and then have to start over? Can we maintain the pipeline of innovative researchers needed in biotech when their only alternatives are to be scientific gypsies or to start their own startups?